Time for Yahoo Management to Own Up to Reality

by: TMT Analyst

Yahoo's (YHOO) shares are down 15% year-to-date, massively underperforming the S&P 500, which is up 2.5% since the beginning of the year. To be fair, Yahoo's main competitor, Google (NASDAQ:GOOG), has seen its share price decline 15% over the same time period as well. Also, to be fair, since Carol Bartz was named CEO on January 13, 2009, Yahoo's shares have appreciated 18%. Not bad for almost two years of work. So remind us why everyone is bashing Ms. Bartz. Oh yes, the shares underperformed the S&P 500, which is up 31% since Bartz took over the helms, and even more, the shares are still 50% below Microsoft's (NASDAQ:MSFT) offer price. So no matter how you view it, Carol Bartz's performance at Yahoo! has underwhelmed. It is a toss up as to who remains in their respective CEO positions by end of 2012, Bartz or President Obama, who assumed his role around the same time as Carol Bartz. We will let you call it. Google's shares are up nearly 70% over the share time period.

About two months ago we posited that Yahoo's management could be taking a page out of John Malone's book and is looking to financial engineer their way to a much better stock price. See write-up here.

In that spirit, we suggested that management should lever the balance sheet and use the cash to aggressively shrink equity. Our analysis suggested that leverage of 2x was appropriate. That, on top of the already existing $3 billion share repurchase program, would boost the share price by 30%.

We also suggested that management spin off the Asian assets into a separate public company or perhaps a tracking stock, providing investors with additional currency. A transaction of that type could be done tax efficiently, we believe, particularly for the Chinese assets.

After those two were done, we suggested that management put the company back on the block seeking an acquirer, perhaps Microsoft or Disney (NYSE:DIS), or that private equity should take a hard look at Yahoo!.

Since then we have not see any evidence that management is leaning towards any of those suggestions all the while the shares flat-lined.

A recent report did suggest that private equity was looking at the company and specifically looking to merge it with AOL. Bad idea. Why merge two fundamentally and secularly challenged ships? Sure, some cost synergies exist, but revenue synergies are practically non-existent with zero scale benefits.

So unless Yahoo!'s management has something magical up their sleeves to explain the two month lull, and we don't believe it will be meaningful improved operational results, we implore Yahoo!'s management to own up to reality and take the above steps to boost the share price.

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